Financing Urban Infrastructure in India through Tax Increment Financing Instruments: A Case for Smart Cities Mission

Mishra, Alok and Malhotra, Abhishek (2020): Financing Urban Infrastructure in India through Tax Increment Financing Instruments: A Case for Smart Cities Mission.

Abstract

The paper is aimed at exploring the Tax Increment Financing (TIF) model for financing planned urban development programmes and projects in Indian cities – smart cities, in particular. This is based on the premise that the TIF approach offers an excellent opportunity to Urban Local Bodies (ULBs) for the creation, capture and recycling of values in cities support funding of core urban infrastructure in a sustained manner. The paper describes the key elements of the TIF model and explains why it is a theoretically elegant and practically desirable strategy for possible adoption by Indian cities at the present stage of urban evolution, when municipal finances are precarious and the municipalities are also not in a position to generate current revenue surplus. The paper is based on the principle of ‘theory follows practice and vice versa’, case studies on TIF as implemented internationally. Finally, the paper suggests directions as to how the TIF principles could be incorporated into the framework of financing innovative projects under the Smart Cities Mission, including accessing capital market funds through municipal bonds. The key findings of the paper suggests that the efficacy of tax increment financing tools in Indian cities will depend on several factors: the versatility of city development strategy and plan; reforms in municipal finance system; reforms in spatial planning; effective design of TIF projects and financing strategies, including mechanisms for value capture and recycling to catalyze economic growth-enhancing enterprises that create further values to land-owners and the city; and human resource capacity to plan, design, finance, implement and monitor projects . If designed well, TIF instruments can act as powerful tools to augment external economies of agglomeration and networking and create economic growth momentum, generating a self-financed or even surplus-generating process of planned urban expansion, development and renewal.

• Item Type: MPRA Paper
• Language: English
• Keywords: Tax Increment Financing, Smart City, Value Capture Financing, land based instruments, Netwroking Economics, Agglomeration Economics
• Subjects: R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R0 - General > R00 - General; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R4 - Transportation Economics; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R5 - Regional Government Analysis > R51 - Finance in Urban and Rural Economies; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R5 - Regional Government Analysis > R52 - Land Use and Other Regulations; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R5 - Regional Government Analysis > R58 - Regional Development Planning and Policy

References

Ahluwalia, Isher, R. Kanbur, and P.K. Mohanty. 2014. Challenges of Urbanisation in India, New Delhi: Sage Publications.

Anderson, John E. 2009. "A Review of the Evidence on Land Value Taxation": In Dye Richard F. and Richard W. England eds. Land Value Taxation: Theory, Evidence, and Practice. Cambridge, Mass: Lincoln Institute of Land Policy.

Bahl, Roy W., Johannes F. Linn and Deborah L. Wetzel eds. 2013. Financing Metropolitan Governments in Developing Countries. Cambridge, Mass: Lincoln Institute of Land Policy.

Bourassa, Steven C. 2009. United States Experience with Land Value Taxation. In Dye Richard F. and Richard W. England eds. Land Value Taxation: Theory, Evidence, and Practice. Cambridge, Mass: Lincoln Institute of Land Policy.

Briffault, Richard. 2010. The Most Popular Tool: Tax Increment Financing and the Political Economy of Local Government. The University of Chicago Law Review

City of Chicago: Annual Financial Analysis 2017 – Tax Increment Financinghttps://chicago.github.io/afa-2017/TIF Accessed 28 February 2018

Ermasova, Natalia and Amanda George 2017. Tax Increment Financing: Learning from Research and Municipal “Best Practices”. Illinois Municipal Policy Journal, Vol. 2, No.1 135-145

Hagman, Donald G., and Dean J. Misczynski, eds. 1978, Windfalls for Wipeouts: Land Value Capture and Compensation. American Society of Planning Officials

High Powered Expert Committee (HPEC). 2014. Report on Indian Urban Infrastructure and Services. The High Powered Expert Committee (HPEC) for Estimating the Investment Requirements for Urban Infrastructure Services. New Delhi.

Jacobs, Jane. 1970. The Economy of Cities. New York: Vintage. ———. 1984. Cities and the Wealth of Nations. New York: Vintage.

Kapoor, Gunja and PadmajaPati. 2017. Municipal Bond Market in India. Discussion Paper No. 06. Pahle India Foundation

McKinsey Global Institute. 2010, India’s Urban Awakening: Building Inclusive Cities, Sustaining Economic Growth. McKinsey and Company.

Ministry of Urban Development, Government of India and the World Bank 2013. “Land Based Fiscal Tools and Practices for Generating Additional Financial Resources” Capacity Building for Urban Development Project (CBUD).

Minnesota House of Representatives, House Research Department: Tax Increment Financing. www.house.leg.state.mn.us accessed 27 February 2018

Mohanty, P. K. 2014. Cities and Public Policy: An Urban Agenda for India. New Delhi: Sage Publications ———. 2016. Financing Cities in India: Municipal Reforms, Fiscal Accountability and Urban Infrastructure. New Delhi: Sage Publications

Musgrave, R.A. and P.B. Musgrave. 1989. Public Finance in Theory and Practice, 4th ed. New York. Mc, Graw Hill.

Mishra, Alok K. and Mohanty P.K. 2018. Urban infrastructure financing in India: Applying the Benefit and earmarking principles of Taxation. Journal of Social and Economic Development, DOI: 10.1007/s40847-018-0059-1.

Panda P, Mishra, Alok K., Mishra, S. Externalities and Urban Infrastructure Financing: A new Theoretical Model and Lessons for Smart Cities in India, International Journal of Transport Economics, Vol. XLVII, No. 1, Pp.1-29. DOI: 10.19272/202006701004

Peterson, George E. 2009. Unlocking Land Values to Finance Urban Infrastructure. The World Bank, Washington, D.C.

Peterson, Sarah Joe. 2014. Tax Increment Financing: Tweaking TIF for the 21st Century. Urban Land, The Urban Land Institute, Washington DC:

Purohit, Mahesh C. 2016. Financing Urban Infrastructure in India: An Overview of Policy Lessons. Discussion Paper 04. Economic and Social Commission for Asia and Pacific. United Nations.

Smolka, Martim O. 2013. Implementing Land Value Capture in Latin America (Policy Focus Report): Policies and Tools for Urban Development, Cambridge, Mass: Lincoln Institute of Land Policy.

Suzuki, Hiroaki, Jin Murakami, Yu-Hung Hong and Beth Tamayose. 2015. Financing Transit Oriented Development with Land Value Capture. Washington DC: World Bank Group.

Suzuki, Hiroaki, Robert Cervero, and KanakoIuchi. 2013. Transforming Cities with Transit: Transit and Land-Use Integration for Sustainable Urban Development. Washington, DC: World Bank. D

Singh, Charan and Chiranjiv Singh. 2015. Financing of Urban Local Bodies in India. Working Paper No. 493. IIMB.